There?s been little jumbo corporate bond issuance for bankers or investors to get their teeth into this year, so GlaxoSmithKline?s $2.5 billion debut dollar offering gave everyone something to celebrate. It was 2004?s second largest corporate dollar bond, after Pacific Gas and Electric?s $6.7 billion offering earlier in March, and the largest dollar deal from a non-US corporate since Telecom Italia last October.
The deal, which comprised a $500 million three-year tranche, a $1.5 billion 10-year and a $500 million 30-year tranche, priced at 40bp, 58bp and 68bp respectively over treasuries. This was even better than the extremely tight price guidance, with a particularly flat curve between 10 and 30 years, and better than GSK could have found in either euros or sterling at the time. At press time, the issue was trading even tighter. ?The three-year is now trading three to four basis points tighter and the 10 and 30 year tranches are 2bp tighter than at launch,? says Morven Jones, managing director at Lehman Brothers.
With the lack of benchmark industrial dollar bond issues in the first quarter, investors lapped up this double-A rated credit. This strong reception was by no means certain. The shortfall of new corporate issues was not necessarily going to attract massive demand when the direction of interest rates was so uncertain and the secondary market so volatile, particularly for a keenly priced credit launched when treasury yields were also low.
However, Jones says that a big new issue was exactly what the market needed. ?Recently, the secondary market has been volatile even though primary market supply has been low. Markets do drift when there?s an absence of supply to validate prevailing credit spreads.? He adds that against this background GSK?s issue by a new, high quality name was very welcome with investors.
Sarah-Jane Chilver-Stainer, vice-president and group treasurer at GlaxoSmithKline, and her team had been planning the deal for some time and monitored the market to assess when it would offer the best conditions to do new, fixed-rate funding. ?We wanted to achieve the bulk of our financing requirement at the beginning of the year, while interest rates and corporate spreads were still low,? she says. ?We filed our 20F report with the SEC on Friday and launched the following Tuesday, so we did it as soon as we could.?
On March 29, the company decided to go for it. ?On Monday morning we discussed with the company whether or not to go,? says Jones. ?Market conditions were in great shape, the new issue calendar was very light and we recommended announcing the transaction immediately.? The deal was priced by mid-afternoon on March 30.
It turned out to be extremely good timing, before Federal Reserve chairman Alan Greenspan sparked fears of a rate rise in August, upset investors and sent 10-year treasury yields shooting up in April. Other international companies that did dollar deals then had a tougher time. ?Three months ago everyone was convinced that rates were only going to go up,? says Eirik Winter, head of European corporate capital markets at Citigroup. ?Then people began to realize that interest rates could actually go down even further and treasury yields did come in accordingly. GSK managed to issue before they backed out again.?
Building a dollar yield curve
GlaxoSmithKline needed new cash to refinance $1.5 billion of maturities in 2004. The deal also allowed the company to establish a yield curve in dollars in what would be its one and only major bond financing of the year. ?We wanted this issue to fit with our existing maturity profile and to raise the most in 10 years, but we also wanted to issue in the classic maturities that appeal to US investors, so we had the choice of three, 10 and 30 years, or five, 10 and 30 years. Now that we have a defined yield curve in dollars , if we need to raise further debt we can issue opportunistically from that curve,? says Chilver-Stainer.
GSK has certainly left investors hungry for more. There was a $6.5 billion order book and no roadshow, even though 81% went to US investors. ?The pharmaceutical sector is very well known because of the large number of US domestic companies in this sector and GSK was a highly rated new name, so there was no need for a roadshow,? says Pippa Mason, head of UK corporate debt markets, at Citigroup. ?Instead, on the Tuesday there was an investor call with a slide presentation on Bloomberg to give investors the opportunity to address any questions to the company.?
But by then only the 10-year tranche was left open as the other order books were closed within a few hours on Monday. ?The company did exactly the amounts they said they would do and they wanted to act responsibly to avoid over-allocation issues, so they shut two tranches early, which was the bookrunners? advice as well,? says Mason.
